Market Temperature: Nippy

2008 M&A Pace Matches 2007.

By  Audra M. Szollosy

Looking towards the finish line.

Deal activity remained dull with 17 transactions during November—the fifth month in 2008 with fewer than 20 deals. Between Sept. 1 and Nov. 30, 59 deals were announced for a year-to-date market barometer of 253 transactions—even with last year’s pace.

Given the recent M&A slowdown, at first blush it may seem surprising that 2008 has been as active as 2007. Will it surpass 2007’s record 264 deals? The financial turmoil around the globe has effectively frozen many lending sources, which has hampered funding and, consequently, prevented many deals from being consummated.

Active buyers continue to decline while the number of first-time buyers continues to rise. Insurance brokerages account for 63% of consolidation over the three months ending in November. The three usual suspects—Brown & Brown, Arthur J. Gallagher, and Hub International—accounted for a third of the buying. Twelve first-time buyers emerged, each acquiring one agency. A new buyer with a familiar name appeared on the scene. Global insurance broker Marsh is launching its new retail operation Marsh & McLennan Agency in the first quarter of 2009. Marsh chairman and CEO Dan Glaser says the agency will be active in acquisitions of smaller agencies.

Wells Fargo announced one transaction in November, bringing its year-to-date total to eight, equal to BB&T’s efforts. Bank buying is down 25% from last year, and it seems unlikely it will rekindle anytime soon.

Insurers picked up the pace a bit in November acquiring four agencies. Insurers continue to acquire in their comfort zone—MGAs, MGUs, and program administrators with whom they have done business—or where they can expand specialist distribution channels. Such is the case with this year’s third largest transaction by deal value. QBE Insurance Group acquired ZC Sterling for a total potential purchase price of $900 million. ZC Sterling is a niche insurance underwriting agency specializing in lender-placed property insurance. Incidentally, ZC Sterling purchased an agency in October. The hunter becomes the hunted.

Other buyers’ activity is down 44% year-over-year. This category is led by LTC Global Solutions having acquired a total of five life and health and long-term care agencies. There have been three private equity investments so far this year compared to seven last year. None compare to the monster transactions of Hub International and USI Holdings being taken private in 2007.

I will summarize full-year 2008 results in the next issue. Look for our in-depth “2008 Year-In-Review” with the April issue of Leader’s Edge. While no one knows for sure what 2009 holds for insurance brokerage M&A, a few things are certain. It is estimated that only one fourth to one third of agencies have a formal perpetuation plan; the number of agency owners nearing retirement age continues to increase; and smaller agencies often lack sufficient leverage with carriers. Perhaps consolidation can be added to those other two things we can always count on.

Send your M&A announcements to Audra Szollosy at Audra.Szollosy@LeadersEdgeMagazine.com